Coronavirus Contract Clauses – What Every Real Estate Investor Should Know About Signing
Written By: Edward Schenkel | Published: July 2, 2020
Real Estate Contracts During the Coronavirus Pandemic
The Covid-19 health crisis has changed everything for the foreseeable future. How we socialize. How we do business. How we interact with our family. And even how we purchase real estate. While I am confident that we will all get through this together and come out stronger, we can still carefully conduct business and do real estate deals while we social distance and quarantine. However, there are critical contract provisions that must be included in real estate contracts during this crisis to account for delays and contract performance hindered by the crisis. This clause is called force majeure clause (also known now as a Coronavirus clause) which accounts for what happens to the parties’ contractual obligations in the event of unforeseen events such as strike, war, or a pandemic such as the Coronavirus.
What is a Force Majeure Clause / Coronavirus Clause?
A force majeure / Coronavirus clause addresses the parties’ obligations in the event that events such as a strike, war, or a pandemic such as a Coronavirus interfere with a contract. Sometimes, force majeure clauses do not include pandemics so it is essential to make sure that the clause specifically calls out the Coronavirus pandemic. A comprehensive Coronavirus clause will provide that the parties’ obligations to each other are reasonably delayed/postponed if the Coronavirus interferes with their obligations, and such obligations may be completely discharged if the parties are not able to close the deal due to the outbreak.
How can the Coronavirus Interfere with Real Estate Deals?
The Coronavirus can interfere with real estate deals in various ways. A common and reoccurring problem is that the title searches and due diligence are delayed due to town hall closures or reduced hours. Accordingly, a title search, municipal search, or zoning due diligence could take significantly longer. It is a good idea to determine whether the town hall of the subject property is closed, has reduced hours, or whatever the case may be, so the parties can plan an appropriate closing date.
Moreover, if environmental testing is required for the deal, such could also be delayed due to the virus. Many companies have reduced staff and are working from home. Similarly, surveys could take longer to complete if required on a particular deal.
The Coronavirus is also causing banks to change their loan packages or even to withdraw certain loans altogether. Accordingly, mortgages may take longer to be approved and processed due to the virus.
These are just some of the ways that the virus is impacting real estate deals. Of course, coordinating the closing can be challenging as many law firms are closed and are doing their best to close through the mail, or using very limited office hours.
Do Coronavirus Clauses Protect Buyers, Sellers, or Both?
The Coronavirus clause protects both buyers and sellers, but they primarily protect buyers. Of course, sellers may have to obtain a payoff statement for existing mortgages, resolve title issues, or do repairs, all of which could be impacted by the Coronavirus. However, the buyer is typically the party that has much more to do before closing, including inspections, due diligence on public records, obtain a mortgage, and so forth.
Moreover, the buyer has a deposit to lose while the seller, although could face a lawsuit in the event of a breach, is not putting up earnest money. Accordingly, the Coronavirus clause protects both parties but primarily the buyer.
Are All Coronavirus Clauses the Same?
Not all Coronavirus clauses are the same and depending on whether you are the buyer or seller, you will have slightly different objectives using a Coronavirus clause. As a buyer, you want very broad protection, which includes delaying dates and allowing the termination of the contract if the Coronavirus significantly interferes with the closing.
A seller should also want to include the Coronavirus clause, but only to allow the reasonable delay of dates; not termination, so the buyer is locked in the deal and is not provided a way out of the deal.
Accordingly, buyers and sellers have slightly different objectives when including such a clause, which is why it is important to retain a good lawyer to negotiate your interests in transactions during the Coronavirus pandemic.
Do I need a Separate Provision for the Inspection and Mortgage Contingency Clauses to Address Delays Caused by Coronavirus?
A good Coronavirus provision will account for delays of the mortgage, inspection, due diligence, and any other contract dates, so typically you will not need a separate provision in the mortgage or inspection contingency clauses, but it cannot hurt to include it anyways.
Should I use a Coronavirus Clause in Other Contracts Such as Leases, Management Agreements, etc.?
Yes. Force Majeure / Coronavirus clauses are not unique to real estate contracts and are important in other types of contracts. They may and should be used in any contract, including leases, management agreements, vendor agreements, buyouts, etc. However, as with real estate contracts, you may want a broader or narrower provision depending on which side of the table you are on.
In summary, real estate deals can still occur during the Coronavirus. However, it is important to include a Coronavirus clause, be ready for possible delays, and be ready to close by mail, or possibly in masks and gloves at your lawyer’s office.